Question

Question Set 7: Purchasing Power Parity and the Law of One Price The table below contains...

Question Set 7: Purchasing Power Parity and the Law of One Price

The table below contains the price of a Big Mac in different countries in the world in January 2017[1]. You will use the information in the table to explain how Big Macs would be traded between countries if Big Macs could be traded among countries.

Country

Big Mac Price

Purchasing Power Parity Exchange Rate

Actual
Exchange Rate

Actual Price in U.S. Dollars

United States

$5.10 (U.S.)

1.0 U.S. Dollar
per U.S. Dollar

1.0 U.S. Dollar per U.S. Dollar

$5.10

Japan

380 Yen

116.7 Yen per U.S. Dollar

Switzerland

6.5 Swiss Francs

1.0

Indonesia

31,000 Rupiahs

13,329 Rupiahs per U.S. Dollar

Canada

6 Canadian Dollars

1.3 Canadian Dollars per U.S. Dollar

China

19.6 Yuan

6.9 Yuan per U.S. Dollar

Mexico

49 Pesos

22.0 Pesos per U.S. Dollar

With the information in the table above, complete and answer the following:

Calculate the purchasing power parity exchange rate between the United States and each of the countries listed above. Remember, purchasing power parity assumes the price of Big Macs in each country would equal $5.10 U.S. dollars.

Using the actual exchange rate in January 2017, calculate the actual price of the Big Mac in U.S. dollars in each country.

If Big Macs were freely traded among countries, in which country would you purchase Big Macs? To which country would you trade Big Macs? What will happen to the price of Big Macs over time in the world if trade occurred?

Explain whether purchasing power parity holds between countries in the long-run.

What factors explain differences in exchange rates in the long-run?

[1] “The Big Mac Index”, The Economist, January 12, 2017.

Homework Answers

Answer #1
COUNTRY BIG MAC PRICE PURCHASING POWER PARITY EXCHANGE RATE ACTUAL EXCHANGE RATE ACTUAL PRICE IN U.S. DOLLARS
UNITED STATES $5.1 (U.S.) 1.0 U.S. DOLLAR PER U.S. DOLLAR 1 U.S. DOLLAR PER U.S. DOLLAR $5.10
JAPAN 380 YEN 595.17 YEN 116.7 YEN PER U.S. DOLLAR $3.26
SWITZERLAND 6.5 SWISS FRANCS 6.5 SWISS FRANCS 1 $5.10
INDONESIA 31000 RUPIAHS 67467.9 RUPIAHS 13229 RUPIAHS PER U.S. DOLLAR $2.34
CANADA 6 CANADIAN DOLLARS 6.63 CANADIAN DOLLAR 1.3 CANADIAN DOLLARS PER U.S. DOLLAR $4.62
CHINA 19.6 YUAN 35.19 YUAN 6.9 YUAN PER U.S. DOLLAR $2.84
MEXICA 49 PESOS 112.2 PESOS 22.0 PESOS PER U.S. DOLLAR $2.23
1) If Big Mac would freely trade then I will purchase from China
2) I would trade to U.S and Switzerland
3) I world trade occur then there will be fall in purchasing power of U.S. and Switzerland for Big Mac product
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The important implication of purchasing power parity theory (for our purposes) is in regard to nominal...
The important implication of purchasing power parity theory (for our purposes) is in regard to nominal exchange rates (and changes in these rates). If purchasing power parity theory is true, we can use price differences (or price level differences more broadly) in two countries to make a prediction of what the nominal exchange rate “should be”. If a Big Mac costs 300 yen in Japan and $3.25 in the U.S., what should be the nominal exchange rate of yen per...
The Economist magazine uses the price of a Big Mac to determine whether a currency is...
The Economist magazine uses the price of a Big Mac to determine whether a currency is undervalued or overvalued. In July​ 2017, the price of a Big Mac was​ $5.30 in New​ York, 19.80 yuan in​ Beijing, and 6.50 Swiss francs in Geneva. The exchange rates were 6.79 yuan per U.S. dollar and 0.96 Swiss francs per U.S. dollar. The price of a Big Mac in different countries​ _______ provide a valid test of purchasing power parity because​ _______. A....
In the US, the price of a Big Mac is $3.5. In China, the price of...
In the US, the price of a Big Mac is $3.5. In China, the price of a Big Mac is ¥12. a. What is the exchange rate of Chinese Yuan under purchasing power parity? b. What is the dollar price of Big Mac in China, if the actual exchange rate is $0.15/¥? c. Is the Chinese Yuan overvalued or undervalued? By how much? d. If China’s GDP in 2018 is ¥80 Trillion, what is its Nominal GDP in USD (use...
This question is based on the concept of the Purchasing Power Parity (the idea that e-rate...
This question is based on the concept of the Purchasing Power Parity (the idea that e-rate should represent a valid comparison of prices across countries). Suppose that the price of Filet-o-Fish McDonald’s meal is 4.56 reals in Brazil, while it is 37 pesos in Mexico. The exchange rate of Brazilian real to Mexican peso is 13.6. How much would Filet-o-Fish meal cost in Mexico in Brazili
Which of the following statement is correct? a. The relative purchasing power parity theory posits that...
Which of the following statement is correct? a. The relative purchasing power parity theory posits that exchange rates are determined by the differences in the prices of a given market basket of traded goods and services when there are transportation costs, tariffs, quotas, and other trade barriers. b. The American depository receipts (ADRs) are never traded on the New York Stock Exchange and the Nasdaq over-the-counter market and cannot be created by buying foreign stock and placing in special trusts....
QUESTION 9 If the purchasing power parity predicted nominal exchange rate is greater than actual nominal...
QUESTION 9 If the purchasing power parity predicted nominal exchange rate is greater than actual nominal exchange rate, then a. the real exchange rate is greater than one b. the real exchange rate equals one c. the real exchange rate is less than one d. nothing can be said about the real exchange rate QUESTION 10 If the indirect quote for the Polish zloty versus the U.S. dollar is 4 zloty per 1 dollar, then the direct quote would be...
Purchasing power parity (PPP) a. Is similar to the law of one price b. States that...
Purchasing power parity (PPP) a. Is similar to the law of one price b. States that the prices of baskets of goods (price levels) will tend to be the same across borders in the long run, allowing for exchange rates c. Requires that, under fixed exchange rates, price levels adjust in the different markets to achieve comparability across borders (allowing for exchange rates) d. All of the above
In this chapter, you learnt about purchasing power parity and the Law of One Price. This...
In this chapter, you learnt about purchasing power parity and the Law of One Price. This is a theoretical concept that says that the same good should sell for the same price anywhere in the world, and exchange rates will ensure that this is the case. For example, if a TV costs $1,000 in the US and $1200 in Canada, the US/CAN exchange rate should be $1,000/$1,200 = 0.83 US/CAN. Can you think of an example and the reason why...
Discuss the difference between absolute and relative purchasing power parity (PPP) using the dollar per euro...
Discuss the difference between absolute and relative purchasing power parity (PPP) using the dollar per euro exchange rate and starting at $1.40/€1 and simple numerical examples. To illustrate absolute PPP concept use a price of the iphone in dollars (you make up the price in dollars) and euros (you make up the price in euros) and discuss what happens of the exchange rate deviates from the absolute PPP rate.
Please verify the my solutions below. These are practice examples and I am unsure if I...
Please verify the my solutions below. These are practice examples and I am unsure if I answered them correctly. Please explain any discrepancies in detail and please explain any calculations or formulas. For parts C&D, please add detail, if my answers are not sufficient. Practice # 17. Considering Purchasing Power Parity and the Law of One Price: part a: Assume that the current price of a Big Mac in the United States today is $2.75. Assume also that the current...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT